Sunday, November 2, 2008

China Should Lead the World

The United States has forfeited its crown of economic leadership. The relative economic position of the U.S. in the world has been eroding for decades. Yet instead of buckling down and doing productive work to contribute to the global economy, the government, financial institutions, and people of the United States have too often behaved like a profligate, decaying aristocracy. Capturing money through speculation, rather than earning it through productive activities, has become an American way of life. Banks went off mission, mortgage brokers operated with the mindset of organized criminals. Ordinary Americans bought houses as financial speculators, rather than as homes for settling in communities of honest, productive people.

The Chinese are in a position to take specific actions that will get the world, including United States citizens, out of the current mess. To understand that their motives could be cooperative, rather than aggressive, you need to understand a bit of Chinese history and culture.

Most economists believe that as late as the year 1800, China had the world’s largest economy. The period from 1800 until about 1950 was a terrible one for most Chinese. The Manchu government had become corrupt and inept, from top to bottom. Its military had become a mere paper army, so first the British, then other Western privateer nations tore into China like a wolf pack into a flock of unprotected sheep. The British introduced and promoted the use of opium, draining money out of China. After about 1900 various reforms were tried, including those introduced by Sun Yat Sen, Chiang Kai-Shek, and the Kuomintang Party. But the combination of civil war and then invasion by the Japanese combined to endow China with one of the world’s most backward economies by the end of World War II in 1945.

Whatever else you may not like about Mao Zedong and the early rule of the Chinese Communist Party, in the first few decades after 1948 they pushed the wolves away and made the Chinese economy largely self-sufficient. State planned economies may have their negative aspects, but they have many positive aspects as well. Finally, in the 1980’s, a balance was struck between private initiative and state supervision that allowed the ancient economic wisdom of China to re-emerge. By the late 1990’s the rest of the world had taken notice of this Chinese resurgence.

The Chinese people, as a whole, have not yet become economically decadent. They save more than they earn and they put a great deal of energy into making a better future for their children. The current Chinese government is surprisingly flexible and insightful, despite being called a dictatorship by the West. Partly this harkens back to the centuries-old Chinese tradition that a good government is not a pack of predators, but a civil service for all the people. While there are many particular Chinese practices I do not like, the same is true of particular American practices, so I will leave those specific issues to other essays.

When China still had a strong economy, in the 17th century, the Emperor allowed trade to begin with European nations (starting with the Portuguese) despite the fact that he believed his nation was economically self-sufficient. “The official view of foreign trade was that the barbarians came as humble petitioners in great need of Chinese goods, and were benevolently permitted to secure them on Chinese terms.” [China, Japan and the Powers, M. Cameron et. al., p. 52]

Today China’s economy has grown rapidly for years. China is an exporting power, but it produces far more goods and services for internal consumption than it exports. Because of conservative monetary policy by the government and the high savings rate of businesses and households, China as a whole has a great deal of money to invest, much of it in U.S. dollars.

American politicians and the press complain that China is somehow economically abusive because it runs a large trade surplus with the United States. But on the whole the annual trade surplus of China was only $32 billion. Taiwan, Japan, and South Korea all export more goods to China than does the United States. Because so many American corporations have moved formerly American factories to third world countries including China, U.S. exports are not what they would have been otherwise. Yet people also forget that as a whole U.S. exports are still more valuable than China’s. U.S. exports in 2005 were $819 billion; China’s were “only” $593 billion. [Figures are from 2007 Pocket World in Figures by The Economist]

The U.S. certainly needs economic, political, and social reforms on a large scale; adjusting to any such reforms will result in some difficulties. But in the meantime the Chinese government and businesses can take some actions that will make the world economy more sound. This will be good for China because the Chinese economy is no longer isolated; it needs the rest of the world as much as we need China.

China needs to purposefully start buying more goods from the United States. This would start a beneficial cycle for both countries, and for the global economy, that could get us through the transition to a production-based prosperity in the U.S. that would replace the failing finance-based pseudo- prosperity of the last 20 years.

China buying more U.S. goods would, of course, narrow the trade deficit between the two nations. It would stimulate U.S. based production and jobs based on production rather than consumption. It would improve the Chinese economy as long as the purchased goods were productivity enhancing. A stronger U.S. economy would, in turn, certainly buy even more goods from China.

I will not pretend that all Chinese people are good and wise, or that its government is always right. On the other hand, the Chinese have governed themselves, mostly successfully, for over 2000 years. For the most part China’s military has been used for defense, not for offense. By stepping up now the Chinese can establish a new style of world leadership. The style should be based on cooperation and harmony, not by war, rapacious business practices, and backstabbing.

I must emphasize that the people of the United States cannot simply rely on Chinese leadership. We must reform ourselves. We need to steer our brightest people to productive occupations, away from Wall Street. We need to tax financial transactions, which are currently untaxed. The citizen-voters need to elect representatives who are determined to have genuine reform. We do not need a larger assortment of economic bandages. We need a society where human values and economic values are in harmony.

We need a world where human values and economic values are in harmony.

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